United States: Capitalizing On A Window Of Opportunity For Reform Of Telecommunications Regulation In The Russian Republic ~ Part 2

Competition, privatization, and internationalization are transforming the global telecommunications environment. The most vivid illustration of the power of these worldwide trends is the Basic Telecom Agreement reached on February 15, 1997, by the Negotiating Group on Basic Telecommunications of the World Trade Organization ("WTO"). After more than two years of negotiations, sixty-nine countries comprising approximately 95% of the global market for telecommunications services entered into a series of multilateral commitments to open their markets for telecommunications services to competition and foreign investment. This achievement is nothing less than extraordinary as it marks a paradigm shift from closed markets dominated by state-owned monopoly enterprises to an era in which private entities compete around the world to provide customers with the best service at the lowest price.

The European Union provides another example of a concerted multilateral response to global trends in the telecommunications industry. While other multinational organizations such as ASEAN and CITEL have conducted studies and made recommendations, only the EU has taken the step of binding members and establishing a separate governance structure with real powers and the ability to enforce its decisions.

The WTO Basic Telecom Agreement was concluded under the framework established by the General Agreement on Trade and Services ("GATS"). The GATS consists of a framework agreement that sets forth general obligations, annexes on specific services sectors (including telecommunications), and schedules of commitments for each signatory. The GATS incorporates two important principles. First, the most-favored-nation principle requires that each WTO member treat services and service suppliers of one WTO member no less favorably than it treats services and service suppliers of any other WTO member. Second, the national treatment principle obligates each WTO member to treat foreign service suppliers no less favorably than it treats its own service suppliers.

The Annex on Telecommunications operates to expand on the general provisions of the GATS in relation to telecommunications. Since telecommunications is both a service in its own right and the basis of the provision of services in other sectors, all service suppliers in the sectors set out in the WTO members' schedules of commitments may take advantage of the rules described in the Annex. The principal obligation set out in the Annex is the requirement that WTO members ensure that service suppliers of other members can secure access to and use of public telecommunications infrastructure on reasonable and non-discriminatory terms. Under these provisions, for example, value added service providers have access to basic telecommunications networks regardless of whether the member in question has entered a commitment to liberalize basic telecommunications.

However, the Annex does not cover all telecommunications services. Under the Annex providers must be able to access leased capacity, connect terminal equipment, interconnect private leased circuits, and use operating protocols of their own choice in supplying any service. The Annex does not provide for facilities-based competition in basic telecommunications through market access. Instead, the rules for such access were left to be hammered out in the WTO Basic Telecom Agreement. Through that process, 69 WTO members entered into commitments for market access, most of which were scheduled to take effect on January 1, 1998. More specifically, 44 WTO Members (representing 99% of WTO Members' total basic telecommunications services revenues) will permit foreign ownership or control of all telecommunications services and facilities, while an additional 12 WTO Members will permit foreign ownership of some services. In addition, 52 WTO Members (covering 88% of WTO Members' international services revenues) will provide market access for the provision of international services and another five will provide market access for limited international services; and 49 WTO Members (accounting for more than 80% of WTO Members' total satellite services revenues) also guaranteed market access for the provision of satellite services.

Each country participating in the Basic Telecom Agreement is obligated to honor both its general GATS obligations and its specific commitments under the agreement with respect to the services and services suppliers of WTO members seeking entry into its basic telecommunications market. A total of nine members took exemptions to the most favored nation principle. India, for example, took an exemption that will enable the government or government-run operator to apply different international accounting rates through bilateral agreements with other operators or countries.

Commitments made under the WTO Basic Telecom Agreement are binding and can be enforced through WTO dispute settlement processes. Any WTO member who wishes to resolve a dispute is first required to undertake bilateral consultations with the other member involved in the dispute. If the consultations fail, the complainant can request that the WTO's Dispute Settlement body establish a panel to consider the dispute. A party found to be acting in contravention of the agreement in question is required to specify the measures it will take to rectify the situation. If these remedial measures are insufficient, the complainant may apply to the Dispute Settlement Body to take trade retaliation against the offending member in any goods or services sector.

In addition to the market access commitments, sixty-five of the participating countries adopted some or all of the pro-competitive regulatory principles embodied in a Reference Paper drafted by the negotiating group. (Of the countries discussed in this paper, the U.S., France, and Chile adopted all of the Reference Paper's principles while India made a partial commitment.) The Reference Paper lists six major regulatory principles:

1. Competitive safeguards, to prevent those with significant market power from using their position to engage in anti-competitive practices;
2. Interconnection, to ensure that new entrants have access to existing telecommunications facilities in a timely manner and under non-discriminatory terms, with a transparent negotiation process and a system for timely dispute resolution by a fair and impartial body;
3. Universal service, with the caveat that any obligation for implementing minimum service standards be no more burdensome than necessary and be administered in a transparent, non-discriminatory, and competitively neutral manner;
4. Public availability of licensing criteria, ensuring that new applicants can determine what will be required of them and what terms and conditions have been applied to those already licensed;
5. Independent regulator, separate from and not accountable to any supplier of telecommunications services, with impartial procedures applied to all market participants; and
6. Fair allocation of scarce resources, implementing objective, timely, transparent, and non-discriminatory procedures to allocate scarce resources such as radio frequencies, telephone numbers, and rights of way, and publishing the current state of allocated frequency bands.

Each signatory was required to ratify its commitments under the WTO Agreement and then adopt the specific laws and regulations necessary to implement them by November 1, 1997. However, only 50 signatories to the agreement were able to meet that date, with several members of the European Union (Belgium, Spain, and Portugal) and Chile among the laggards. Those countries have now been given until July 31, 1998 to officially accept the pact by adopting the necessary laws and regulations. Implementation is therefore likely to be delayed somewhat.

In any event, almost all of the signatories will have to establish new regulatory bodies, since only a handful at present could satisfy their obligations under the Reference Paper. Given the novelty of global access and competition in the telecommunications sector, it is very likely that a number of countries will have great difficulty in shedding old ways of thinking and putting in place the kind of regime that the WTO Agreement envisions. It is quite likely that the WTO will be called upon over the next few years to adjudicate disputes involving national regulators and new, foreign entrants.

Since the Russian Republic is not a member of the WTO at this time, it will not enjoy the benefits of market access under the recently concluded WTO Agreement. Nor has it committed to putting in place the kind of pro-competitive regulatory structure that most other developed countries deem necessary to attracting and providing quality telecommunications services in the future. There is, however, an opportunity to join the WTO and commit to telecommunications reforms, or at least to begin the process soon after the commitments take effect in 1998. The Russian Republic is currently engaged in negotiations for WTO entry, and should redouble its efforts in order to achieve the benefits of membership as quickly as possible.

The European Union offers another example of commitments to transform the telecommunications landscape on a multilateral, though regional, basis. The European telecommunications sector has historically been characterized by an industrial policy of creating "national champions" that enjoy monopoly protections within each country. In a 1987 Green Paper on the development of telecommunications services and equipment, the European Commission ("EC") proposed the introduction of more competition in the telecommunications market combined with a higher degree of harmonization in order to achieve to the maximum extent possible the opportunities and economies of scale offered by a single, pan-European market. Over the decade since, the EC has adopted a number of directives designed to bring about this new, competitive regional market.

The EC adopted a Services Directive in 1990 that provided for the removal of special and exclusive rights granted by member states for the supply of value-added services by the end of 1990 and for data services by January 1, 1993, but permitted the exclusive rights over the supply of public voice telephony service to continue temporarily. This Directive also required the separation of operational and regulatory functions. While most member states implemented this portion of the Directive, in 1995 the EC found that the degree of separation between the national regulatory authorities and operator function was still not sufficiently clear in at least five member states. In October 1995, the EC adopted a Directive lifting restrictions on the use of cable television networks for carriage of already liberalized telecommunications services (i.e., all but voice telephony). In January 1996, the EC adopted a Directive that included mobile communications among the liberalized value-added services. And in February 1996 the EC issued a further directive specifying that restrictions on use of alternative infrastructure for liberalized services be lifted by July 1, 1996. The directive requires all member states to take the necessary steps to ensure that markets are fully open -- including the provision of public voice telephony -- by January 1, 1998. This last directive requires interconnection to the voice telephony service and public switched networks to be granted on non-discriminatory, proportional, and transparent terms based on objective criteria, and specifically calls for publication of the terms and conditions for interconnection to the basic functional components of the network by July 1, 1997.

The EC views interconnection as a key element in the future competitive environment, allowing new market entrants access to existing end-users, on a basis which will encourage increased investment and market growth in the telecommunications sector within a predictable and stable regulatory environment. EC directives establish an interconnection framework giving priority to commercial negotiations between interconnecting parties, although some conditions are set by national regulatory authorities. Also important are effective mechanisms for impartial dispute resolution. Public telecommunications operators with significant market power (generally defined as those with a 25% or greater share of the relevant market) must provide interconnection on non-discriminatory terms, publish interconnection price lists, establish cost-oriented interconnection tariffs supported by transparent cost accounting systems, and implement accounting separation in certain cases. The EC also recommended that rates be set at the level of the average of the best three rates available in the EU.

The EC recently issued a Directive related to authorization of service providers. It prohibits any limitation in the number of new entrants, except to the extent required to ensure an efficient use of radio frequencies and, under limited circumstances and for a temporary period, of telephone numbers. It also gives priority to the use of general authorizations as opposed to individual licenses to reduce the need for prior approval by national regulatory authorities. General authorizations should be supplemented with individual licenses only where operators gain access to scarce physical or other resources or are subject to special obligations such as the responsibility to provide universal service. In order to reassure entities applying for telecommunication licenses, the EC favors establishing time limits and other procedural guarantees on processing, as well as other principles with which national licensing regimes will have to comply, in particular with respect to conditions that may be attached to licenses. (e.g., fees must correspond to processing expenses only). In addition, in order to encourage a coordinated regional approach, the EC supports systems that will facilitate simultaneous applications for and granting of licenses in several member states. Such regional licensing is consistent with several EC directives which have established common frequency bands to ensure pan-European operations of wireless and satellite systems.

While the European efforts to create a more open and pro-competitive market environment is laudable, one cannot expect the overhaul of a system built on decades of monopoly and dominant nationalist carriers to proceed without resistance. For example, in November 1997, the EC initiated enforcement proceedings against seven countries (Belgium, Denmark, Germany, Greece, Italy, Luxembourg, and Portugal) for violating the Competition Directive, focusing particularly on the failure to establish independent regulatory agencies, and issued an opinion against Spain for its resistance to implementing reforms. In December, the EC launched an investigation into the high prices charged by dominant carriers for international services. The data gathered in this investigation may be used not only to prepare a price fixing case against various carriers, but also to establish fully cost-based international accounting rates, even if those rates are asymmetric on a single route, in a challenge to the benchmarks recently set by the FCC for U.S. international carriers. Unfortunately, entrenched incumbents can be expected to fight the erosion of their market share and monopoly rents by any means possible, including enlisting powerful allies in the political structure to delay or dilute the introduction of competition. Thus, reform is not a single act, but rather an ongoing effort that will take time, dedication, and perseverance.

* * *

These multilateral approaches underscore the breadth and power of the forces that are currently transforming telecommunications markets around the world. But it remains the obligation of individual nations to follow through on such commitments. Accordingly, the majority of this paper discusses the approaches taken in four countries to address the regulatory challenges presented by accelerating global trends in the telecommunications industry, in order to identify and illustrate strategies that should be emulated or avoided.

By any measure, the United States has one of the most advanced, open, and competitive telecommunications markets in the world, characterized by high penetration of basic services, a wide diversity of enhanced services, and constant striving for innovation. The U.S. telecommunications market is also without doubt the largest and most lucrative in the world, with over $222 billion in revenue for 1996.

It is no coincidence that such success is found in a market governed for over 60 years by an independent regulator with transparent processes and no financial interest in service providers, where operators are privately owned and competition has been increasingly seen as superior to regulation in achieving better services and lower prices. Yet even in such an advanced and open market, the dissolution of old barriers and the introduction of new technologies continue to present both challenges and opportunities.

In the U.S., most communications policy comes from the Federal Communications Commission ("FCC"), which also acts as the chief regulator of the telecommunications industry. Created by Congress in 1934, the FCC is the oldest independent telecommunications regulatory agency in the world. Among its responsibilities in regulating interstate and foreign communications are the following:

• allocation of spectrum for commercial and non-federal government uses;
• assignment of licenses for broadcast, satellite, common carrier, and private radio services making use of radio frequencies;
• authorizing common carrier services in interstate and foreign commerce;
• monitoring and regulating interconnection, cost allocation, and tariffing by regulated entities;
• equipment authorization and standard setting; and
• establishing rules in these and related areas.

The President nominates each of the FCC's five Commissioners and designates one of them to serve as Chairman. The nominees must be confirmed by the Senate. The Commissioners are appointed to serve terms of five years which are staggered so that one term expires each year. No more than three of the five Commissioners may be members of the same political party. No Commissioner may participate in a proceeding in which he has a pecuniary interest, and no Commissioner or FCC employee may have a financial interest in any entity subject to FCC regulation. The FCC is divided along functional lines into five Bureaus (Cable Services, Common Carrier, International, Mass Media, and Wireless Telecommunications) and several offices, each of which may exercise authority delegated by the full FCC. Federal appellate courts have jurisdiction to review FCC actions, although generally the standard of review is one of deference to the expert administrative agency.

The FCC makes communications policy through rulemaking, licensing, and adjudicatory proceedings. In each case, the FCC is obligated by statute to give notice to the public so that anyone interested in the proceeding has an opportunity to participate. The FCC can initiate proceedings to change its rules and regulations, or suggestions for such changes may come from sources outside the FCC by either formal petition, legislation, court decision, or by informal suggestion. All communications to the FCC related to a pending proceeding must be reflected in the record of that proceeding, and all final decisions and orders are publicly available in a published series of reports, most of which are also available over the Internet from the FCC's web site. The FCC has also proposed a system that will allow the public to file materials electronically over the Internet, further enhancing public participation in and access to the regulatory process.

Although the FCC takes the lead in developing of U.S. government communications policy, there are many areas in which the executive and legislative branches of government play crucial roles. Within the executive branch, the National Telecommunications and Information Administration ("NTIA") acts as the principal policy adviser for the President, Vice President, and Secretary of Commerce on communications issues, and also regulates all government use of the radio spectrum. NTIA is part of the Department of Commerce and is headed by the Assistant Secretary. The Department of State has primary authority for the conduct of foreign policy with respect to telecommunications. The Coordinator for International Communications and Information Policy ("CIP") is responsible for directing this effort and, in conjunction with the FCC and NTIA, represents U.S. interests in bilateral and multilateral negotiations on international policy. A number of other Executive Branch agencies are also involved in the creation of telecommunications policy, including the Department of Justice, which enforces antitrust laws and represents law enforcement interests; the Office of the U.S. Trade Representative, which administers trade agreements and coordinates national trade policy; and the Department of Defense, which is responsible for national security and administers its own communications facilities and services.

Both NTIA and the State Department also have avenues for public participation. NTIA periodically solicits public comment on various aspects of domestic and international telecommunications issues. Using these comments, NTIA drafts reports discussing its tentative conclusions which are published in the Federal Register. Further public comment is then invited. The State Department has two private sector advisory groups to allow public input in developing U.S. positions in international communications and policy matters.

Congress can set communications law and policy directly by adopting new legislation, but it rarely does so. Prior to the Telecommunications Act of 1996, the country's primary telecommunications law had not been comprehensively reviewed and rewritten in over 60 years. Instead, Congress influences the policymaking process through its legislative power, its oversight functions, and its control over the federal budget. Although the FCC is considered to be an independent regulatory agency, it is directly responsible to Congress, remains subject to congressional oversight, and is dependent upon Congress for operating funds. Congress also has oversight responsibilities with respect to executive branch agencies, including NTIA and CIP, and may hold oversight or other hearings to influence decisions on critical matters.

While federal law and federal agencies determine policy with respect to radio spectrum and international telecommunications matters, each of the fifty states has exclusive control of intrastate telephone and other carrier services within its borders. This power is exercised by state utility commissions which are regulatory agencies established by state legislatures. These legislatures adopt laws regarding intrastate communications services and determine the powers of their respective public utility commissions. Federal law may, however, supersede state laws or regulations that impair the federal regulatory scheme or involve federal antitrust matters. State courts have jurisdiction to review decisions taken by the state public utility commissions. The United States Supreme Court has ultimate jurisdiction to review a state court decision that raises an issue of federal law.

The FCC manages all commercial use of the radio spectrum, while NTIA oversees government use. In general, commercial use of spectrum requires an FCC license which authorizes a particular person or entity to use specified frequencies and sets out any conditions on that use. The spectrum remains the property of the government, however, and the FCC retains the right to modify licenses if it determines that the public interest so requires. In order to make allocation decisions among competing, mutually exclusive applications for spectrum, the FCC has increasingly made use of auctions. The FCC has also recently begun to allow flexible use of spectrum once assigned. Both of these trends theoretically allow the market to determine the highest and best use for spectrum rather than relying on regulators to predetermine the nature of the market. However, some spectrum has been reserved for public functions and likely will never be subject to auction. The FCC also participates in ITU processes that result in international spectrum management allocations and decisions.

NTIA manages government use of spectrum. As the government has chosen to rely increasingly upon commercial systems -- especially for satellite services -- the clear demarcation has begun to break down, creating confusion among service providers and even within the agencies.

The universal availability of basic telecommunications service at affordable rates has been a fundamental element of telecommunications policy in the United States for decades. Historically, universal service has been funded indirectly, as part of a complex system of direct charges on some customers and above-cost charges for certain local telephone company services. In particular, long distance and business users paid higher prices in order to subsidize residential telephone rates. When AT&T controlled both local and long distance service in the U.S., this system of charges had no competitive impact since the same vertically integrated company simply moved money from one account to another. With the break-up of AT&T in 1984, however, the system had to change.

The FCC responded to competition in the interexchange market by implementing an access charge regime which is characterized by a series of "line charges" that local exchange carriers impose on either end users or interexchange carriers. The subscriber line charge ("SLC"), for example, is a flat rate charge imposed on all end users. In order to subsidize those users who might find this flat charge too burdensome, the FCC strengthened its Lifeline Assistance Program, which reduces monthly telephone bills for qualifying subscribers by an amount equal to the SLC. The FCC also established the Universal Service Fund, which provides assistance to telephone companies whose costs exceed the national average, as well as other explicit and implicit subsidies.

The Telecommunications Act of 1996 promises to introduce true competition at the local level, making the patchwork system of subsidies more problematic. The Act therefore makes clear that, to the extent possible, support mechanisms should be explicit rather than implicit, and should apply to all providers of interstate telecommunications services (rather than just wireline operators) on a nondiscriminatory basis. The Act also sets forth principles that are to guide the FCC in establishing policies for the preservation of universal service. These principles include quality services available at just, reasonable, and affordable rates; access to advanced services available to all regions of the nation; access in rural and high cost areas to reasonably comparable services at comparable rates; equitable and nondiscriminatory contributions by all providers of telecommunications services; specific and predictable support mechanisms; and access to advanced telecommunications services for schools, health care, and libraries.

Based on the principles enumerated in the Act and guided by the recommendation of a Joint Board comprised of federal and state representatives, the FCC recently issued a 900 page order implementing the legislative mandate. The FCC found that the following services should receive economic support from universal service subsidies: voice grade access to the public switched network; touch-tone service; single-party service; access to emergency services, operator services, interexchange services, and directory assistance; and Lifeline and Link Up services for qualifying low income consumers. The most substantive modifications to the definition of universal service will provide up to $2.25 billion per year to subsidize discounts of 20% to 90% for eligible schools and libraries purchasing telecommunications services and Internet access, and up to $400 million per year to support telecommunications services for all public and not-for-profit health care providers located in rural areas. The Universal Service Fund has been expanded to include new levies on cellular, paging, and international services, in an effort to make the system more technology-neutral.

In a companion order issued on the same day, the FCC slashed the access charges paid by interexchange carriers to LECs to initiate and complete calls over local networks. These fees, totaling about $14 billion annually, are heavily inflated in order to subsidize basic telephone service for disadvantaged users. The FCC mandated a reduction of $1.7 billion in access charges over the next year, based largely on the promise that large interexchange carriers would pass these savings on directly to consumers. It also revised the formula by which the remaining charges will be calculated -- primarily by increasing the "productivity factor" that drives the price caps -- that should result in an overall reduction in access charges of approximately $18.5 billion over five years. In addition, although it froze the current SLC for primary residential and one-line business users, the FCC raised the charges for other lines to allow LECs to recover some of the lost revenue. These orders did not resolve all issues. A further rulemaking will be conducted to establish a mechanism for determining support levels for high cost areas based on forward looking economic costs, and the FCC will also continue to explore the use of competitive bidding as a mechanism to provide universal service.

The FCC employs a "competitive carrier policy" under which common carriers are classified as either dominant or non-dominant. Dominant carriers have market power and therefore are subject to interconnection safeguards and other regulation to guard against anticompetitive behavior. Since non-dominant carriers have no market power, they are subject to far less regulation. Similarly, carriers without facilities which depend upon others to transport their services present little threat to market forces and are therefore subject to virtually no regulation. All common carriers, both dominant and non-dominant, must charge reasonable rates and refrain from undue discrimination in supplying services to customers.

As for services, the FCC has created two categories: "basic" and "enhanced." The competitive carrier policy applies only to basic services. In 1980, the FCC determined that enhanced services -- such as voice mail, the Internet, and e-mail -- need not be regulated.

Although the U.S. government has never operated the nation's telecommunications infrastructure, prior to 1984 both local and long distance service was dominated by a single provider, AT&T. In 1974, the Department of Justice filed an antitrust action against AT&T, its wholly owned manufacturing subsidiary, and its research and development arm challenging AT&T's de facto monopoly. In a negotiated settlement of the lawsuit announced in 1982 and implemented in 1984, AT&T was allowed to retain its nationwide and international communications network, its manufacturing function, and its research subsidiary, but was required to divest its local telephone operations, which comprised about three quarters of its assets. The divested local operations were consolidated into seven Regional Bell Operating Companies ("RBOCs") which retained their monopolies over local service in their respective areas, but were prohibited from providing long-distance service, barred from manufacturing telecommunications equipment, and required to provide equal interconnections to all long-distance carriers and information providers. As a result, there are now four national long distance networks and hundreds of other carriers operating in the U.S., and AT&T, though still the largest, is no longer regulated as the dominant carrier in the market. AT&T's share of toll revenues has fallen from nearly 90% in 1984 to 51% in 1997, while over the same period MCI and Sprint have tripled their shares (to 18% and 9%, respectively) and a new entrant, WorldCom, has obtained a 7% market share. Long distance prices have fallen 72% since 1984 in real terms as a result of such competition. This same competition has, however, fueled demand for long distance services and increased the overall size of the market, tripling the total volume of interstate calls per year from 1984 through 1995 and nearly doubling revenues for all long distance carriers. Thus, the once-dominant carrier has continued to prosper even as its market share has eroded.

Competition has come more slowly at the local level. By 1996, 27 states either allowed full competition in the provision of switched local exchange service or had mandated an opening of that market, but little real competition had emerged. In the Telecommunications Act of 1996, Congress set the stage for true competition in the local regions, mandating that the RBOCs and other incumbent local exchange carriers (such as GTE) provide interconnection, unbundled access to network elements, resale of services, and physical collocation of equipment. In exchange, the Act allowed the incumbent local exchange carriers to provide interexchange service outside their regions immediately and offered the prospect of such service in their own regions once local service there had become sufficiently competitive. And, as discussed below, the process of implementing the interconnection mandate has been a difficult one, as would be expected whenever a group of powerful companies is forced to give up a virtual monopoly. Although the 1996 Act was passed almost two years ago, only three RBOCs have even attempted to make the case that local competition justifies their entry into the long distance market. One application was withdrawn, and all others have been rejected by the FCC. However, a federal trial court recently threw out the restriction on RBOC entry into in-region long distance, a decision which the FCC and a number of carriers have appealed. If upheld, the decision will remove the primary incentive driving RBOCs to open their markets, and thus likely will delay the entry of competing providers.

In the last year, a number of the RBOCs have begun to reconsolidate the AT&T system, with SBC Communications merging with Pacific Bell to dominate the southwest and Bell Atlantic merging with NYNEX to form a solid block in the populous and lucrative northeast. Congress has expressed its unease with this process, since its reforms in the Telecommunications Act of 1996 assumed that RBOCs would compete against one another in both local and long distance markets. Congress has not, however, taken any direct steps to bar further reconsolidation.

As for international services, U.S. carriers have been very active in forming multinational alliances. AT&T heads the World Partners global alliance of telecommunications operators, which includes KDD of Japan, Singapore Telecom, Telstra, and the Unisource consortium of the national operators of Sweden, Switzerland, and the Netherlands. MCI Communications Corporation is part of the Concert alliance, headed by British Telecom, which also includes Telefonica de Espana -- a recent defector from World Partners. And Sprint, the nation's third major long distance carrier, is partly owned by (and operates in the Global One worldwide joint venture with) France Telecom and Deutsche Telekom. Many other U.S.-based carriers also offer international service, either over their own facilities or by reselling the facilities of larger carriers. In addition, an increasing number of foreign-based carriers are providing international service from and to the U.S., especially on a resale basis.

The comparatively low international rates charged by U.S. carriers have enabled them to offer "call-back" services. Call-back allows a customer located outside the U.S. to access a U.S.-based international switch. In the most common form of call-back, the customer calls the provider's switch in the U.S., waits a predetermined number of rings, and hangs up. The switch then automatically returns the call, providing the customer with a U.S. dialtone. All subsequent traffic thus originates from the U.S. switch, billed at U.S. tariffed rates which are usually much lower than those in the originating country. The use of call-back services has increased markedly over the last five years, with the number of providers growing from six in 1990 to over sixty today in a market of approximately a half billion dollars. Call-back service has been an important force in driving down international rates even in countries that nominally have no competition on international routes. In fact, as many as 50 developing countries have restricted or banned the service in order to protect their telecommunications revenues.

In recent years, wireline telephone services have faced increasing competition from new wireless technologies, which were never part of the AT&T monopoly. For example, cellular telephone service has been available in the U.S. since 1984. In order to ensure competition in the cellular telephone service, the FCC divided the country into 734 different markets and licensed two entities for each market. The largest 306 markets are Metropolitan Statistical Areas ("MSAs") and the remaining 428 markets are smaller Rural Service Areas ("RSAs"). The FCC awarded the first 25 MHz cellular licenses to consortia of wireline providers, and assigned the second license in each market using comparative hearings and, later, lotteries. The licensees were given five years in which to build out their systems. Any area within an MSA or RSA not covered by a built-out system after five years is deemed "unserved" and competing providers can apply to serve the area. In addition, a large number of operators have entered the cellular market by reselling capacity purchased at wholesale prices from the facilities-based carriers. Cellular service is now almost ubiquitous.

Although cellular technology is the most established form of mobile wireless telephony service, it increasingly faces competition from a competing technology known as Personal Communications Service ("PCS"). In general, broadband PCS system design is similar to cellular except that it has operated in a digital format from its inception, giving it greater capacity, and it requires more cells and base stations due to the propagation characteristics of the frequencies. The Commission has allocated 120 MHz of spectrum to broadband PCS, which has been divided into six bands, three of which contain 30 MHz each (Blocks A, B, and C) and three of which contain 10 MHz each (Blocks D, E, and F). In March 1995, the FCC concluded auctions for Block A and B PCS licenses in each of 51 large geographic areas called Major Trading Areas ("MTA"). The majority of these licenses went to companies, or joint ventures of companies, that were already established in the cellular business. In May 1996, the FCC concluded an auction of the C Block PCS license in each of 493 smaller geographic areas called Basic Trading Areas ("BTA"), with participation limited to entrepreneurs. In January 1997, the Commission completed the simultaneous auction of D, E, and F Block licenses in each of the 493 BTAs. The FCC has not mandated the use of any particular technology for implementing PCS, and at present licensees have announced plans to use a number of different standards. However, because of the huge sums bid at auction, a number of C Block entrepreneurs have failed or are on the verge of doing so, prompting the FCC to revise its rules to afford more favorable payment terms.

The Commission has also allocated 3 MHz of spectrum to narrowband PCS, all of which is expected to be used for advanced messaging, such as two-way and digitized voice paging, and other data services. In July 1994, the Commission auctioned ten nationwide licenses and awarded another through a "pioneer's preference" to a company that had led the way in developing the narrowband PCS technology. Later in 1994, the Commission auctioned another 30 regional licenses. The Commission has announced its intention to issue as many as 1,343 additional licenses for smaller areas. The Commission has also issued over 1000 Specialized Mobile Radio ("SMR") licenses to use 10 MHz of spectrum in various cities. Originally created as a dispatch service to provide two-way voice communications between business vehicles, SMR operators today have interconnected with each other -- but not with the public switched network -- to provide private mobile telephone service over relatively wide geographic areas.

As a result of increased competition, the average cellular subscriber's bill has been cut in half over the last decade. Many providers virtually give away the handsets in order to establish a base of subscribers and there has been a noticeable increase in the number of lower priced service packages and alternative service options being offered. The introduction of PCS has also accelerated the conversion of cellular systems from analog to digital technologies. In order to avoid excessive concentration of wireless licenses and promote and preserve competition in these services, the FCC has imposed a 45 MHz cap on spectrum held by any one entity in a single market for use in cellular, SMR, or PCS service.

Although wireless technology has to date concentrated primarily on mobile users, it is likely that "wireless local loop" applications will soon be introduced on a large scale as a way to bypass the local wireline providers entirely. For example, AT&T has already stated its interest in establishing such fixed wireless systems as a facilities-based competitor to the RBOCs. In addition, the FCC recently set aside 1,300 MHz of spectrum for the Local Multipoint Distribution Service ("LMDS"), which is capable of offering many wireless services including local telephony and broadband Internet access. Two licenses will be available in each BTA, one authorizing use of 1150 MHz and the other for 150 Mhz, and licensees will be permitted to disaggregate and partition their licenses in any manner. The auction of this spectrum in December 1997 will offer wireless system operators a unique opportunity to challenge the dominance of wireline carriers in the home and office. In fact, the FCC has adopted a rule prohibiting incumbent LECs from obtaining the 1150 Mhz license in their current operating regions for a period of three years in order to assure that new competitors have access to the spectrum.

The United States has authorized more satellites than any other country, and licensees provide a wide array of services to users around the world. Generally speaking, the FCC assigns orbital locations and frequencies through processing rounds in which all applications filed by a certain cut-off date are considered simultaneously. Applicants must meet certain financial qualifications in order to be considered, and their systems must comply with the technical parameters established in the band plans and other regulations adopted by the FCC. Once licensed, satellite operators are free to sell or lease transponders to other parties, who are then also free to resell that capacity. They may also provide common carrier service, though they are not required to do so. No additional license is required to provide value added services via satellite. Until recently, the FCC differentiated between satellites authorized to provide domestic services and those "separate systems" authorized to provide international services. In January 1996, however, it consolidated its rules and harmonized the regulatory treatment of all satellites such that operators may provide domestic and/or international service as they see fit in light of market conditions.

Transmitting satellite earth stations must also be licensed by the FCC, but the only limit on this process is spectrum availability and the avoidance of interference with other terrestrial and satellite systems. Earth station licenses generally grant a blanket authorization for communications with any U.S.-licensed satellite and may upon request also authorize communications with specified foreign-licensed satellites. However, Comsat, the U.S. signatory to Intelsat, is the sole provider of services over Intelsat satellites for communications from or to the U.S.

The Telecommunications Act of 1996 imposes general duties of access and non-discrimination on every telecommunications carrier and each local exchange carrier ("LEC"). The 1996 Act imposes more substantial obligations on incumbent LECs -- the RBOCs and others who currently operate in a near-monopoly environment. Incumbent LECs are required to provide interconnection for the transmission and routing of exchange and exchange access services at any technically feasible point within their networks. They must provide non-discriminatory access to network elements at just and reasonable costs on an unbundled basis in a manner that enables the requesting party to combine the network elements to provide a telecommunications service. They must permit each of their services to be resold by third parties and must offer for sale (at wholesale rates) any services offered to retail subscribers. Incumbent LECs must also allow firms seeking interconnection and unbundled access to locate their equipment on the incumbent LEC's premises. All LECs are required to provide number portability (allowing a customer to retain his phone number even if he changes his phone company), dialing parity (all phone companies offering similar dialing patterns for services such as directory assistance and long distance access), and access to their poles, conduits, and rights of way to competing service providers.

Under the system established by the statute, incumbent LECs have a duty to negotiate in good faith with those desiring to provide competing local exchange service to arrive at particular terms and conditions for interconnection. At any point during the negotiations, either party may ask the regulatory commission of the state in which service is to be provided to mediate differences arising from the negotiations. Between 135 and 160 days after requesting interconnection negotiations, a new entrant may petition the state commission to arbitrate any open issues. The state commission must resolve each issue contained in the arbitration petition within nine months of the original initiation of interconnection negotiations. Any interconnection agreement, whether the result of negotiations or arbitration, must be submitted to the state commission for approval, which must be either granted or denied within 90 days for negotiated agreements or 30 days for arbitrated agreements. The decisions of a state commission are subject to review by the federal courts. Final interconnection agreements are available for public inspection, and a LEC is thereafter obligated to make available any interconnection arrangement, service, or network element provided under such an agreement available to any other requesting telecommunications carrier on the same terms and conditions.

In August 1996, the FCC adopted a 700 page Report and Order establishing a framework for interconnection agreements. One of the central and most controversial parts of that order was its use of a forward-looking methodology that based interconnection rates on long-run incremental costs of interconnection rather than on a more standard methodology that would have allowed incumbents to continue to recover their historic costs as well. The FCC also determined that although new entrants could build their own facilities, they would also be allowed to operate solely by unbundling and reselling the facilities of the incumbent LEC. After losing the battle at the FCC, the largest incumbent LECs and certain state regulatory authorities challenged the interconnection order in a federal appellate court. In July 1997, the court struck down many of the rules adopted in the FCC's interconnection order, including the pricing rules, on the grounds that the FCC had exceeded its jurisdiction and improperly intruded upon intrastate affairs reserved for state authorities.

In addition, LECs have belabored negotiations for interconnection agreements, many of which have resulted in impasse and been referred to arbitration. It is interesting to note, however, that in this arbitration process, most state commissions have used a forward-looking pricing methodology similar to that adopted by the FCC. Nonetheless, at present the incumbent LECs largely maintain their stranglehold over local telephone service in their regions.

Section 310 of the Communications Act of 1934 sets a series of limitations on various types of foreign ownership of companies that are licensed by the FCC. The statute prohibits granting any license to a foreign government or its representative. With respect to companies licensed to provide common carrier, broadcast, aeronautical en route, and aeronautical fixed services, Section 310 allows foreign investors to own or vote up to a 20% direct interest in the licensee, or up to a 25% ownership or voting interest in the holding company of a licensee. Significantly, these limitations do not affect foreign investment in companies that do not provide the enumerated services, such as those operating private networks using wireline, wireless, or satellite technology, or those manufacturing communications-related equipment. In addition, the FCC has the discretion to allow a greater foreign investment in a holding company if it finds that such ownership would not be contrary to the public interest.

In 1995, the FCC adopted rules for analyzing proposed foreign investments of greater than 25% in the holding company of a common carrier under which it would examine whether the home market of a foreign investor offers effective competitive opportunities to U.S. entities seeking to invest in providers of comparable services in that foreign home market. If such opportunities exist, the FCC would allow additional foreign investment above the 25% benchmark, up to and including 100% foreign ownership, absent other countervailing public interest factors. The FCC had also proposed new rules that would employ a similar "ECO test" to determine whether foreign-licensed satellites should be granted access to the U.S. market.

The U.S. WTO commitment eliminated almost all remaining restrictions on foreign investment and entry for other WTO member countries. Effective January 1, 1998, the U.S. has committed to allow up to 100% indirect foreign ownership of telecommunications facilities and companies, although the (easily circumvented) 20% limit on direct investment imposed by Section 310 remains. In light of the United States' commitments under the WTO Agreement, the FCC recently replaced the ECO test with an open entry standard for applicants from WTO Member countries that includes a presumption in favor of foreign participation, streamlined procedures for processing applications, and additional regulatory safeguards against potential anticompetitive abuses of market power. It adopted a similar presumption for entry by foreign-licensed satellites. In both cases, however, the FCC retained the right to deny entry on public interest grounds such as national defense, law enforcement, and anticompetitive impact, and also where scarcity of spectrum makes such entry impracticable. The ECO test will continue to apply to non-WTO countries after January 1, 1998.

This open and competitive market has consistently been a world leader in innovation and service, as market pressures unknown to protected state monopolies have driven providers to search continuously for new and better ways to attract customers. In addition, a long tradition of open, transparent, and independent regulatory oversight has provided the stability and predictability necessary for long-range telecommunications planning and investment. As a result, the U.S. telecommunications market is the largest and most lucrative in the world.

The U.S. regulatory model is also instructive in a number of more subtle ways. For example, the FCC and other government entities afford many avenues through which the public may participate in the process of shaping telecommunications regulation. Such participation is not limited to reacting to proposals by government, but also allows proactive petitioning of the government. This system empowers users, operators, and manufacturers while drawing on their creativity and experience rather than relying solely on regulators for insight and innovation. In addition, the FCC has made a conscious effort to rely on market forces rather than regulation where possible. This is especially apparent in the use of spectrum auctions and flexible, technology-neutral spectrum allocations that allow individual providers to determine the best type of system and the highest use for scarce spectrum resources.

The U.S. system is not without its problems, however. For example, local markets remain largely under the control of regional monopolies. The incumbent local exchange carriers have continued to fight tooth and nail to protect their market power and may -- at least in the near term -- succeed in stifling competition. Their success to date demonstrates the difficulty of breaking down outdated and anticompetitive ways of doing business in the telecom sector even under the best of circumstances. Any country that does not enjoy such advantages can expect and should prepare itself for an even more difficult process of introducing a new regime.

There are also institutional problems with the U.S. system. The FCC depends upon Congress for funding, and pressure from a senator or congressman who sits on an important committee often carries inordinate weight. Until fairly recently, this "political capture" was exacerbated by "industry capture," but the diversification of the telecom market over the last decade and the increasing sophistication of regulators have combined to prevent one or a few powerful companies from dominating the FCC. The regulatory process is unnecessarily complicated by overlapping jurisdiction over competition and spectrum management issues, and the mandated political diversity of the FCC -- while perhaps a useful check on power -- can result in a dysfunctional agency incapable of acting (or acting consistently) on important but controversial issues.

Despite problems, the U.S. system offers much to be admired. Any country retooling it own regulatory system would do well to achieve a similarly open and transparent process while improving on the institutional structure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.